Written by Blaine Thiederman MBA, CFP. Founder of Progress Wealth Management
Although the stock market has served millions of investors for over a century, recent years have shown me that investments such as stocks are often misunderstood, misused, and even abused.
The great bull market of 1982–1999 came to a screeching halt in 2000. During 2000–2002, millions of investors lost a total of over 5 trillion dollars. What bothers me is that much of that loss was easily avoidable. Investors at the tail end of a bull market often think that stock investing is an easy and near certain way to make a quick fortune. What they often find out soon thereafter is how wrong they are. There’s reason why the stock market is called “The Great Humbler”. It’s because so many people who “play” the stock market are incredibly overconfident and don’t see the stock market as it is; a tool to build wealth (not a place to gamble).
The countless stories of investors who lost ridiculous amounts of money speculating in tech stocks, dot coms, and other nonsensical stock picking strategies are lessons for all of us. Successful investment strategies take diligent work, knowledge, interest and most importantly, patience. This series of articles will help you understand how to get started investing, what to do first before you jump in and how to maintain your portfolio.
Who this is for:
You probably found this article in a search engine or by perusing my website for one reason or another and recognize that there’s room for improvement in how you manage your financial life. You probably would describe yourself in one of the following ways:
- You’re a beginner and you want a crash course on how to invest in the stock market that’s easily digestible and (hopefully) interesting.
- You’re already an investor and you’re really just looking to brush up a bit and see if you’re missing anything.
- You invest but you’re not positive you are making an optimal use of the stock market and are looking for education on how to improve.
- You know someone who maybe could benefit from learning more about investing and you’d like to give them a resource they can use.
This article is fitting for all four quadrants of people.
How this series of articles is organized.
- How To Prepare Before Getting Started
- The Only Investment Strategies Worth Their Salt
- When To Pivot and Change Your Strategy (and How To)
The Fact of the matter is, like many things in life, most investors make mistakes first and learn from their mistakes, second and these mistakes likely cost them literally thousands of dollars in the long run of things. Your success as an investor doesn’t just depend on your ability to analyze the broad stock market, the macro-economic health of the world economy, the SEC Reports of every company in the respective industries you hope to invest in and their direct competition but ALSO your ability to know when to pivot and sell (and not get emotional when the data says otherwise). These are monumental tasks for many people and therefore, investing in individual stocks is inappropriate for most non-professionals. If you’re not prepared for a potentially full-time job, you may want to reconsider.
Too many people risk too much making inappropriate investments because they don’t take the time to analyze their financial life, goals, plans, resources, earning ability, saving ability and risk tolerance before they invest.
A simpler way to think about it is, if you were on track to retire and live the rest of your life the exact way you hope to investing in a basic, mutual fund portfolio; would you start buying lottery tickets and betting on horses just in case? No, of course not. You could throw away your good circumstances so easily. The point I’m trying to drive home is, as you manage your money, take risk purposefully. If you don’t know how and aren’t really interested in learning and putting the effort into it, it absolutely makes sense to hire on a professional like Progress Wealth Management to help you with this.
Before You Get Started, Make Sure You’re Prepared
In This Chapter, we’ll review:
- Start with the basics
- How to look before you leap (and why it’s necessary)
- Risk Management
Starting With The Basics
When we all get started building our financial lives, it’s important to start at ground zero; which is when you ask yourself “what are my goals?“. Most people think that a financial goal is a single dollar amount or the ability to purchase some item that they think would make their lives happier and they might be right in some senses but when financial planners discuss “financial goals”, they’re really referencing things like the ability to live a certain, happier life or provide for their children.
Once you’ve created your short-term and long-term financial goals, your next step is figuring out how much you have to save in order to get there and what kind of returns you need to accomplish to attain in order to afford the goals you have.
This isn’t a simple calculation so most self-directed investors depend on some kind of online financial planning calculator. For non-professionals whom aren’t interested in paying a fee, the best free one we’ve found is included here.
Look Before You Leap… Otherwise You May End Up Regretting it
From there, ask yourself if you think it’s reasonable. Is it over 7%? If that’s the case, it may not be because 7%, while doable, isn’t easy to get for many people with any sort of consistency. That financial plan could be way too over-confident.
If your goals aren’t feasible, you probably should reassess your goals or your plans meaning that you can:
- Push your goals back so you have more time to save
- Change your goals and choose less expensive ones, instead.
- Save more and invest more effectively
We’ll talk more about your options for your retirement plan and how to choose which one is right for you later in this article but it’s important to bring up the requirement of setting realistic and reasonable goals as a vital step in this process.
Once you’ve set your goals, the next step is understanding what the foundation of your financial future should really look like. This is different for every person because we don’t all have the same income, employability, risk tolerance, family size and needs.
For some people, an emergency account that’s equivalent to 3 months of your NEEDS is appropriate and for others, potentially as much as 12 months can make sense.
In order to figure out the proper dollar amount to keep in savings, you need to create a budget which, for many people, sounds like a dirty word because of how constricting budgets sound like they have to be. That’s the case. We believe that the traditional budget isn’t just inappropriate but impossible to use and really live a happy, low-stress financial life.
Alternatively, we like the 50/30/20 rule which gives you room to live your life and not have to follow a budget but still requires you to spend purposefully and be aware of how much you’re spending each month. We’ve found most all of our clients live happier lives that feel less constricting by using this method of budgeting as opposed to a most specific budget.
We created a guide to help you implement this new way of budgeting and figuring out how much to keep in emergency savings. You can get access to this guide at no cost by clicking here.
Once you’ve created a budget and set your goal for monthly savings, the next step is to ensure that you save purposefully every month until your emergency fund is fully funded.
The last step before we start discussing investing is risk management (i.e. Insurance and estate planning). At Progress Wealth Management, we HATE insurance because the whole industry is built upon a hope that its clients never benefit from purchasing something they sell. It seems wrong but at the same time, it’s a necessary evil because in reality, we can’t afford to live without insurance in Colorado. All it takes is one hail storm, fire or major medical bill and our financial plan for our future is ruined.
We don’t sell insurance at Progress Wealth Management but many financial advisors in Colorado and throughout the nation do. When buying insurance, the first step is to ask yourself what kinds of risks could ruin your life and your loved ones lives.
- If you became disabled, would it be affordable for your family to support you and themselves?
- If you died or your spouse died, what would your family have to pay for?
- If you got into a major car crash or if someone got hurt on your property and you were sued for all you’re worth, do you at least enough liability coverage on your homeowners and auto insurance to protect yourself?
- If you died and you have kids, would your life savings be under the control of someone you’d trust to look out for your children or do you not know?
These are the kinds of risks that you should consider when evaluating if you have enough insurance. If you’re not sure where to start, you probably need help. We offer complimentary analysis of your financial circumstances. If you’d like a complimentary analysis, click here and to schedule an appointment.
Click here to view the next article in the series where we get started discussing investment strategies.